Markets think the odds of a Fed pause in December are rising

• Traders see a 45% chance the Fed pauses rate cuts in December, up from 17% last week.
• The rising odds come as markets digest a win for Trump, whose policies could complicate the Fed's plans.
• Fed officials this week have also urged caution on more easing in recent remarks.

After two consecutive interest rate cuts, markets think the Federal Reserve might be ready to hit pause.

According to the CME FedWatch tool, traders are now pricing in higher odds that the Fed will keep rates unchanged in December, with a 45% chance of a pause compared to 17% last week.

The rising odds come as markets continue to digest a win for Donald Trump, and as Fed officials have sounded cautious on the path of future policy easing in recent remarks.

The President-elect's policies, including sweeping tariffs and a crackdown on immigration, are expected by economists to drive up inflation.

Economists have cautioned the Fed's decision could hinge on whether it chooses to anticipate the impacts of Trump's policy proposals. Economist Joseph Stiglitz told BI over the summer that Trump's expansionary policies could force the Fed to eventually raise interest rates again, while JPMorgan Asset Management's David Kelly has said they could prompt a pause at the December meeting.

Fed Chair Jerome Powell has said the central bank doesn't factor in politics and refused to comment on topics related to the election during a press conference following the central bank's last policy meeting (apart from answering "no" when asked if he'd resign if Trump asked him to).

But JPMorgan's Kelly says that while the Fed operates independently, it still reacts to political developments if they inform where the economy may be heading.

"They're not going to try to tell the federal government what to do, but they will respond to what the federal government is doing or what the federal government is likely to do," Kelly told BI just before the election.

The rising odds of a pause also come as Fed speakers this week have struck a cautious tone.

Michelle Bowman, the lone dissenter on the Fed's big 50 basis point rate cut in September, advocated for a careful path forward during a Wednesday speech in West Palm Beach, Florida.

"I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the end point," she said, later pointing to inflation as a key reason.

"We have seen considerable progress in lowering inflation since early 2023, but progress seems to have stalled in recent months," she added in the text of her remarks.

Federal Reserve Governor Lisa Cook said the pace and depth of rate cuts will depend on data and the economic outlook, and that the Fed should move to a neutral policy position over time.

"It likely will be appropriate to move the policy rate toward a more neutral stance over time," Cook said during remarks at the University of Virginia in Charlottesville on Wednesday.

Chair Jerome Powell, meanwhile, said last week that the Fed is in "no hurry" to cut rates.

"The economy is not sending any signals that we need to be in a hurry to lower rates," Powell said during prepared comments at an event in Dallas. "The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully."

The Fed's next policy decision will be delivered at the conclusion of its meeting on December 18.